US-led sanctions campaign weakened Russia’s economy in first year of Ukraine war. Year 2 is about sealing the cracks.

By Jeremy Diamond and Sam Fossum, CNN

A year of unprecedented, US-led sanctions designed to isolate one of the world’s largest economies has left Russia weakened, but not incapacitated.

Instead of the forecast double-digit GDP drop, Russia’s economy contracted by about 3% last year. After an initial crash heralded by President Joe Biden, the country’s currency has stabilized. And while US export controls have restricted Russia’s ability to obtain necessary components to manufacture some sophisticated military hardware, Russia has found countries willing to help keep its war machine humming.

If the first year of the US-led sanctions campaign was all about cutting Russia off from the global economy and degrading its military industrial complex, year two will be focused on sealing the cracks.

Biden administration officials say they will apply a laser-like focus on cracking down on Russia’s sanction evasion efforts, which span adversaries like China as well as allies and partners like Turkey, India and the United Arab Emirates.

That focus will include an important shift: After a year focused on trying to wrangle countries into compliance with US sanctions through a combination of technical assistance and delicate diplomacy, the administration now plans to take its efforts directly to individual companies.

The administration will present “a clear choice” to those companies, Deputy Treasury Secretary Wally Adeyemo told CNN in an interview.

“If they continue to sell Russia materials in support of their war effort, then they’re not going to have access to the economies of our coalition, which frankly represent a far bigger customer to them,” Adeyemo said.

That effort started on Friday, when the administration announced sanctions for “over 200 individuals and entities, including both Russian and third-country actors across Europe, Asia, and the Middle East that are supporting Russia’s war effort.” Those sanctions were imposed along with the US’ partners in the G7 and other allies.

Still, the one-year macroeconomic effects are less than Biden administration officials predicted publicly at the outset. But, while Russia has successfully mitigated some of the short-term pain, Biden administration officials and sanctions experts predict devastating long-term consequences lie ahead for an increasingly isolated Russian economy.

“The contraction this year is smaller than what I predicted publicly, but to my mind what Putin has done is prop up this year’s growth, in an accounting sense, by sacrificing long term growth potential,” said Daleep Singh, Biden’s former deputy national security adviser and one of the primary architects of the Russia sanctions.

“The lasting consequence of this war will be that Russia has lost Europe and the G7 as energy consumers and that’s going to dry out the major source of export revenue that remains. And it’s going to leave Russia as a smaller, weaker, more isolated economy,” Singh said.

These new efforts come at a critical moment in the war — both Ukraine and Russia appear to be gearing up for a spring offensive and the high-expenditure, artillery-based warfare is drawing attention to dwindling Western munitions stockpiles. That has raised the stakes for the West to deliver a powerful blow to Russia’s defense industrial base and its ability to finance its war effort.

Russia finds nations willing to make a deal

A recently enacted price cap on Russian oil is taking a significant bite out of Russia’s revenues. But amid the crush of Western sanctions, Russia has found alternative sources of revenue by increasing its exports to China, Brazil, India and Turkey. Some of those very countries are also backfilling Russian demand for key products and technologies the US and its coalition have cut off.

Lawmakers from both sides of the aisle are increasingly urging the administration to get more aggressive with countries that are helping Russia get around the sanctions.

“I do think we need to apply more pressure on these countries and not allow them to become an escape valve for Vladimir Putin and his efforts to fund the war machine,” said Sen. Chris Van Hollen, a Maryland Democrat who has said the US should withhold advanced F-16s from Turkey.

Multiple administration officials declined to say whether they are considering more coercive steps to get friendly countries like Turkey and India on board with the sanctions effort. Instead, they emphasized a combination of rigorous diplomacy and increased enforcement of sanctions to plug existing holes.

“I wouldn’t say this is us standing around, gnashing our teeth in frustration. It’s instead just doing the hard work of making sure our sanctions are effective,” a senior administration official said.

The latest round of sanctions, expected this week around the first anniversary of the war, are expected to make that point, focusing on sanctions evasion networks and Russia’s military production.

Treasury and Commerce Department officials have traveled to countries key to Russia’s evasion and backfilling efforts in recent months to secure more cooperation. Just last month, Treasury Under Secretary for Terrorism and Financial Intelligence Brian Nelson traveled to the United Arab Emirates and Turkey — two close US security partners that have also been hubs of Russian sanctions evasion — and warned of new measures the US could take to crackdown.

“Countries all around the world that seek to backfill the Russian war machine should attempt to evade our controls at their own peril,” Deputy Commerce Secretary Don Graves said.

‘Deglobalization of a large economy’

Sanctions experts say the scale of the US’ sanctions on an economy as large and connected as Russia’s is unprecedented.

“This is a major example of deglobalization of a large economy, which we haven’t seen ever before,” said Vladimir Milov, a Russian economist and opposition politician who served as deputy minister of energy in 2002.

In the first days after Russia’s invasion of Ukraine, the US and its allies worked quickly to impose devastating sanctions on Russia’s central bank and its major private banks, freezing about $300 billion of Russian reserves and disconnecting those banks from the global financial messaging system, known as SWIFT. Since then, the US has sanctioned more than 2,000 Russian firms and individuals.

Russian industrial production has suffered, the country’s military is struggling to obtain key components to produce some weaponry and hundreds of international companies have exited the Russian market, amplifying the effect of US sanctions.

Anastassia Fedyk, an assistant professor of finance at the University of California-Berkeley and member of the International Working Group on Russian Sanctions, pointed to the long-term impacts the war and sanctions regime will have on the Russian economy.

“These are going to be cumulative effects,” she said. “I think looking forward, the outlook is not positive for the Russian economy at all.”

While a senior administration official conceded that the administration did not anticipate the extent to which energy prices surged following Russia’s invasion — in turn boosting revenues on Russia’s primary export — officials are convinced the price cap on Russian oil will deliver a blow to Russia’s ability to finance its war effort.

Already, Western oil sanctions are beginning to hit their mark, sending Russian oil and gas revenues down 46% last month compared to the prior year and leaving Russia with a $25 billion budget deficit.

Asked to reflect on key moments in the year of US sanctions against Russia, both Adeyemo and Singh pointed to the initial round of crushing financial sanctions within days of the invasion as the moment Russia’s economic fate was sealed.

“I remember vividly waking up at 3 a.m., talking to my counterpart in the EU, Bjoern Seibert, and saying, ‘It’s go time,'” Singh said. “By 5 p.m., the package was made public and it was a moment when the major democracies of the world moved faster and stronger than we had in decades.”

“When we look back a decade from now, that’ll be the moment where Russia’s economy went from one that was opening up, and it was growing and becoming more European, and where Russia’s economy started to deteriorate and started the slow decline that will make it look more like Iran’s economy a decade from now,” Adeyemo said.

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